Hurdle Rate, the Zero Lower Bound, and Investors’ Active Risk Taking
56 Pages Posted: 30 Jul 2018
Date Written: July 29, 2018
We add an internal “hurdle rate” to explain fund flows of fixed income mutual funds. Hurdle rates are inelastic and heterogeneous. Investors with zero hurdle rates always fol-low fund performance. When fund returns fall below the positive hurdle rate of an investor, the investor would no longer follow relative performance. Rather, the investor will seek riskier mutual funds to match his/her hurdle rate, a behaviour we refer to as “active risk taking”. Our empirical design identifies the external condition on which investors with positive hurdle rates could switch to active risk-taking in large scale. The condition is zero lower bound.
Keywords: Hurdle rate, zero lower bound, fixed-income, fund flows, risk-taking, mutual fund
JEL Classification: G20, G23, G28
Suggested Citation: Suggested Citation